A recent opinion from the North Carolina Court of Appeals addresses some common borrower defenses within the context of foreclosure and statute of frauds issues: compromise and settlement, accord and satisfaction, the covenant of good faith and fair dealing, equitable estoppel and offset. 

We're talking about Macon Bank, Inc. v. Gleaner, et al., Nos. COA14-809, COA14-810 (March 17, 2015).

We'll simplify the facts and posture. 

The Case

Borrowers defaulted on two loans, which secured a home and undeveloped land in Highlands, North Carolina.  One of the borrowers testified that an employee of the lending bank told borrowers to "stop making any payments on the loans", and that he told the lending bank employee "that he would give [lending bank] the Highlands property 'in lieu of any foreclosure or any other judgment or losses'".  These discussions were not in writing, but borrowers contend these statements constitute a modification that satisfied any outstanding debt.  Borrower "eventually" gave the house keys to the lending bank. 

Bank later sued to foreclose and pursue deficiency.  The trial court granted summary judgment to the lending bank in both lawsuits -- the reason for two suits is not important for our purposes -- which were consolidated on appeal.

The Court of Appeals affirmed summary judgment in the bank's favor.  In doing so, the Court addressed some of the borrowers' defenses. 

Let's review.

Statute of Frauds Applicable to Certain "Commercial Loans"

Certain loans (and loan modifications) governed by North Carolina law must be in writing, such as "commercial loans" that are "in excess of fifty thousand dollars ($50,000)" subject to certain exceptions.  N.C. Gen. Stat. § 22-5 (2009).

Accord and Satisfaction versus Compromise and Settlement

"The doctrines of accord and satisfaction and compromise and settlement carry the following two distinctions: (1) performance is necessary to complete an accord and satisfaction but is not necessary to complete a compromise and settlement; and (2) an accord and satisfaction may be based upon an undisputed or liquidated claim, whereas a compromise and settlement must be based upon a disputed claim."

Accord and Satisfaction and the Statute of Frauds

An accord and satisfaction as to a loan must satisfy the statute of frauds, if the statute of frauds is applicable to the loan. 

The Covenant of Good Faith and Fair Dealing and the Statute of Frauds

The covenant of good faith and fair dealing, which is arguably implied in "every contract" governed by North Carolina law, cannot be breached where the alleged contract does not comply with the statute of frauds.  This is because there is no contract from which to imply the covenant.

Equitable Estoppel and Statute of Frauds

"[E]quitable estoppel may override the statute of frauds so as to enforce an otherwise unenforceable agreement" but only where "where the party seeking to invoke the statute of frauds has engaged in “plain, clear and deliberate fraud."  However, in this case, defendant "did not aver in his affidavit that [lender bank] intended to deceive him and thus defendants have not proffered any evidence of actual fraud".

Offset and Mortgagee-In-Possession

Borrower defendants assert that the lending bank owes them lost rent from the date the lending bank received the keys to the rental house through to the date of foreclosure -- an amount that must offset from the debt owed to the lending bank --"because, as a mortgagee-in-possession, [the lending bank] had a duty to account for rent."

As to a mortgagee-in-possession of real property, the duty is clear in terms of rents and the application of rents to the indebtedness: "When he takes possession he becomes liable to keep such premises in usual repair and to account for the rents and profits received, in a settlement of the mortgage debts. The rents with which a mortgagee or trustee in possession is chargeable are applicable as credits on the debt secured by the mortgage."

But what is the amount of rent applicable, where the mortgagor is "over a barrel":  "A mortgagee-in-possession must pay the 'highest fair rent' and becomes responsible for 'all such acts or omissions as would . . . constitute claims on an ordinary tenant, because by entry and possession he makes himself 'tenant of the land[.]''"" 

But how do we determine if a mortgagee is a mortgagee-in-possession?  The Court articulates the standard:  "[A] mortgagee must exercise more than mere constructive possession to become a mortgagee-in-possession."

Here, although defendants arguably have proffered some evidence that plaintiff had constructive possession of the rental house upon delivery of the keys, defendants proffer no evidence that plaintiff exercised actual possession of the rental house or that they were excluded from the rental house. Thus, the lending bank was not a mortgagee-in-possession. 

Therefore, no offset applies in this context.